Examination of Witnesses
Mr John McVay, Mr Charles Wace and Ms
Q322 Chairman: Welcome
and thank you very much for coming; we are very grateful to you.
I think you know what we are doing. What we basically are seeking
to do is to look at film and television and see what contribution
they are makingI suppose that economic contribution is
one of the most important but it is not the only contributionand
then to see what else the Government, any government, can do to
help the movement go further. That is what we are about really,
to see what else we can suggest in two very important industries.
Mr McVay, perhaps you would like to begin. Could you explain to
us what the objectives of your organisation are and how your organisation
is made up.
Mr McVay: I would like to introduce
my Chairman, Charles Wace, who will give you an opening statement
on what that is.
Mr Wace: PACT is the trade association
that represents the interests of the independent production community
in terms of television and in terms of film. I think that we like
to see ourselves as being one of the few successful parts of the
creative economy at the moment, even despite the credit crunch
and everything that has been thrown at it. The independent production
community currently turns over some £2 billion. We create
more than half of all UK TV programmes. In the UK as a whole when
you look at film, it actually has a total investment of more than
£0.5 billion in terms of film last year. Collectively, we
employ more than 21,000 people and that is more than all the PSBs
put together, the public sector broadcasters put together, and
it is not just commercial success, it is creative success as well.
If you look at the last Oscars, Slum Dog Millionaire was
a run-away success with eight Oscars in the film sector and, in
the documentary sector, Man on Wire winning an Oscar for
best world-wide documentary.
Q323 Chairman: Your
estimate is that you employ 21,000 people?
Mr Wace: That is indeed correct.
Q324 Chairman: How many
companies? I have it down here as 600 member companies.
Mr McVay: That is correct; it is
around 600. It changes because the barriers to entry to be a film
or TV producer are quite low. So many people start up businesses
and, if they are still in business two years later, they have
probably become a producer. The churn rate is quite high; we estimate
around 20 per cent of our membership at any time.
Q325 Chairman: I suppose
there is always the feeling that when one says independent production
companies, these are really rather small companies, but in fact
that is not the case, is it?
Mr McVay: No. As a consequence
of the Communications Act 2003, we have seen considerable consolidation
in the sector. When I started at PACT many years ago in 2001,
we had over 1,000 companies and we are now down to 600. The top
ten companies account for 80 per cent of all TV product for British
broadcasters and increasingly the top six account for the vast
majority of international production as well. They range in scale
from companies turning over £200,000 a year to companies
turning over in excess of £300 million a year.
Q326 Lord Gordon of
Strathblane: Chairman, I wonder if it would be possible to get
from our guests a short paper just illustrating this very wide
spread that there is between the small garret operation and the
company that is really at least as big as some television companies.
Mr McVay: Yes, absolutely. There
are various documents which we can provide you with and we would
be delighted to do so.
Q327 Chairman: Why has
the Communications Act 2003 had an impact?
Mr McVay: For the 20-odd years
prior to 2003, the independent sector was effectively a fee-based
business where you were a gun for hire, where you worked for a
broadcaster and you obtained little, if any, value in the intellectual
property rights in the programme. Post the Communications Act
2003and a very progressive and far-sighted bit of legislation
if I may addit enabled companies
Q328 Chairman: In some
Mr McVay: I would say for the UK,
it enabled entrepreneurs to raise money to float on the stock
market, to raise funding from private equity and venture capitalists
and that drove a period of consolidation where companies moved
together in order to become more globally competitive. That has
been very productive. The UK independents now account for a large
part of US prime-time networks and, for some of our members, the
revenues from the US will exceed $100 million over the next year.
Q329 Chairman: If you
were to generalise, do you find the independent production sector
in sturdy health at the moment?
Mr McVay: I think that it is precarious.
Clearly with the downturn in advertising revenues and the pressure
that places on commercial broadcasters, there is increasing price
pressure in the market, but because producers own their own intellectual
property rights and are able to sell then to the international
market where, for instance, a company like ITV may now offer considerably
less for an hour of prime-time drama in the UK, producers are
now able to go and find the deficit finance in other territories
and bring that to the UK programme budget, which means that UK
audiences actually still get high-quality programming that actually
our market cannot really afford. So, it is a combination of spread
risk between the broadcaster and the producer and producers, because
they own their property, are driven to exploit it internationally.
So, we have moved from basically a cottage industry focused on
earning fees for a job to basically becoming a more global and
Ms Calderwood: It also means that
producers actually bring investment to production whereas in the
past producers were always looking for the broadcaster to fully
fund production. Producers actually bring a significant proportion
of investment to the table.
Q330 Chairman: Previously,
you were rather a gun for hire, if I can put it that way, working
entirely on a fee basis.
Mr McVay: Absolutely and well paid.
Q331 Chairman: Now,
it has become much stronger. Do the producer companies have too
Mr McVay: No because, at the end
of the day, it is the buyers who are always dominant; it is the
buyers who have the money and you have to produce the ideas and
the talent in order to win a commission. Given that the four main
terrestrial networks are still the dominant buyers in the UK market,
if you cannot win a commission and you cannot come up with the
package that the broadcaster needs, you will not win the work.
Buyers are still the people who write the cheques and, without
coming up with ideas and winning commissions ...
Q332 Baroness McIntosh
of Hudnall: May I go back to the number of people you employ;
I think you said 21,000.
Mr McVay: That is according to
Skillset's own employment census.
Q333 Baroness McIntosh
of Hudnall: What I think we are struggling with is understanding
what these employment figures actually mean in terms of whether
that is a full-time equivalent number or whether that is 21,000
people for example who regard themselves as predominantly employed
in the business of making film or television but do not actually
necessarily make a full-time living out of it. Can you unpack
the figure for us a little?
Mr McVay: As I say, it is Skillset's
figure but I am happy to provide further analysis on that. As
I understand it, it is the full-time equivalent but the vast bulk
of those jobs are freelance jobs and short-term contracts which
applies to film and televisionthat is how the industry
is structuredwhere productions flex. Production companies
flex when they win a commission and reduce when they do not have
Q334 Baroness McIntosh
of Hudnall: Putting it very simplistically, 21,000 people, so
to speak, might in fact be twice or three times that number of
people doing the equivalent of 21,000 people's worth of work,
which means that the spread of work actually does not provide
necessarily a good living for everybody who is involved in the
Mr McVay: I think that, like in
any labour market, if you are highly skilled and highly talented
in the film and television industry in whatever grade you work
in, whether that is in production, directing, executive producer
or post-production, you can earn a very attractive living and
indeed that is why many people choose to work freelance because
they have a choice of the different products that they work on.
It is a creative industry, so it is not like you are turning up
and packaging sandwiches, you are working on creative products.
So, for many people, the choice of a freelance career is the way
they develop their creative talent and ability and indeed that
has been one of the strengths in the UK where we have a very flexible
and creative labour market. Clearly in a recession where it is
harder to raise finance for production and there is a decrease
in production, that will impact unfortunately on the labour market
as well and, like many other industries, one of the things we
have to look at is our cost base in the UK, particularly in high-cost
drama, in order to make sure that we are competitive both in terms
of attracting inward international film production but also sustaining
our very high levels of television drama.
Chairman: We will obviously go
into the employment and training position in much more detail
when we will have evidence from Skillset.
Q335 Lord Inglewood:
Earlier in your remarks, in the context of television, you talked
about the relationship between the broadcasters and yourselves.
Obviously, partly because of the 2003 Act and partly because the
terms of trade arrangements have been put in place, there have
been changes in that relationship. Do you think that one side
or the other is starting from an essentially dominant position
and, if so, how?
Mr McVay: I think that was one
of the major insights in the Communications Act 2003 in that it
created a more shared risk and more shared value and reward for
the investment and the exploitation of British content. So, I
would not say that either party is dominant. Again, one of the
beauties, if you like, of the Communications Act was the introduction
of very high level codes of practice which have been introduced
by the Regulator. Those codes of practice do not dictate the terms
that are subsequently negotiated. Those terms are negotiated between
ourselves and the four regulated broadcaster concernedBBC,
Channel 4, ITV and Five. So, it is a market negotiation and that
market negotiation reflects the differences/changes in the market.
I would say that, like any negotiation, you win something out
of that and you lose something out of that but, at the end of
the negotiation, by and large, most people have walked away reasonably
satisfied that the terms they achieved were equitable.
Q336 Lord Inglewood:
That is probably the crucial point. You feel that the framework
within which you operate enables a fair deal to be struck from
each side's perspective?
Mr McVay: Yes. Clearly some broadcasters
post the negotiation maybe felt that they did not do as good a
deal as they wanted to, but all is fair in love and war.
Q337 Lord Inglewood:
Win some, lose some.
Mr McVay: Yes.
Q338 Lord Inglewood:
You also spoke earlier about the desirability of being able to
exploit all the secondary IP rights which obviously have burgeoned
and become much more valuable.
Mr McVay: Yes.
Q339 Lord Inglewood:
Then you intimated that you felt that your members were not getting
a fair crack of the whip. Is that right?
Mr McVay: I think that previously
we do not think that we were getting a fair crack of the whip.
I think we have every chance now to exploit our content. There
are still some issues in the market which we think are damaging
to the long-term development of the communication and media industries
in the UK and that is often to do with what is called a hold-back
by broadcasters on the content, particularly in relation to returning
popular series where those series cannot be released for secondary
exploitation for anywhere from two to three years. In 2006 when
we agreed that, that seemed eminently sensible but, in a world
which is accelerating to high-speed broadband, two years might
as well be 20 years. We think that there needs to be some sort
of review about what is effectively warehousing of content from
the secondary markets in order to allow particularly broadband
and video-on-demand services to further develop in the UK.
Mr Wace: It is also fair to say
that the industry is moving ahead very quickly in terms of digital
and I think that we are very keen to see the framework that exists
in television also replicated in the digital framework as well
so that digital producers have the same rights as television producers.
Q340 Lord Inglewood:
Digital Britain is proposing that there should be a government
review of this area. Are these the kinds of things that you are
thinking that review should contain and is there anything else?
Mr McVay: Absolutely. We do think
that Digital Britain has an important role to play to set the
framework or give at least a direction of what sort of market
we will see developing in the UK. One area which we have asked
Digital Britain to look at specifically is public sector procurement.
Currently, if you are creating a website for a government department,
you might come up with a unique bit of code that could be used
later on in some other commercial application. Again, currently,
if you write that code, it then gets taken off you under Crown
copyright and it cannot be exploited. Our position is that while
clearly there are issues around state aid on that and clearly
the public should get some return to their investment, that investment
could be seen as seed funding for the development for our next
generation of digital companies making digital content.
Q341 Lord Inglewood:
But the converse is true that if suddenly all this framework were
to be removed, you think that your members would be in an unfair
position in the market.
Mr McVay: If we did not have the
codes of practice via the Communications Act to sustain the development
of the sector, we would retract very quickly, broadcasters would
seek to take all programme rights on all platforms in perpetuity
in the universe, however so invented, from their previous
Q342 Chairman: I would
like to follow up Lord Inglewood's question. When you mention
the public sector, are you basically saying that the public sector
are an exception really to the fairness deal that you happen to
have done elsewhere?
Mr McVay: I think that we have
demonstrated that if you allow British IP creators the opportunity
to exploit the IP that they do create, both domestically and internationally,
then they are driven to do so. If they have no access to the products
they create because they are effectively warehoused either under
commercial terms or under Crown copyright, then you are still
guns for hire, and, as we move to a more digital era, we think
that there is an opportunity to try and replicate what happened
in television in the new digital commissioning. Clearly, the public
sector spends in excess of £300 million a year on digital
Q343 Chairman: Have
you put this to the Government?
Mr McVay: We have; it is part of
our Digital Britain submission.
Q344 Chairman: But you
presumably put it beforehand, did you not?
Mr McVay: We have been talking
about this to Government for about two-and-a-half years.
Q345 Chairman: Then
you must by now have some vague feeling about how the Government
respond to all this after two-and-a-half years of conversation.
Mr McVay: We and various others
have put various submissions to the Government around the development
of Digital Britain, hence I think the creation of the Digital
Britain project in order to resolve lots of issues around that,
and clearly public sector procurement is part of what Digital
Britain is looking at.
Q346 Lord Macdonald
of Tradeston: ITV seems to believe that taking more of its production
in-house is essential to future viability. It is also looking
at the possibility of ceasing to become a public service broadcaster.
If that happened, would all your agreements with ITV then fall?
Would they be free to take everything in-house? Is there anything
in their present proposals about changing the quotas in terms
of independents being commissioned from outside London et cetera
that concerns you?
Mr McVay: If ITV want to get 75
per cent, as they are entitled to under the law, of their own
commissions, it is just a matter of them coming up with good ideas
that their commissioning editors want to commission. There is
nothing to stop them doing that right now. The fact is that about
36 per cent of all the programming is made externally by independent
producers from across the UK. There is nothing to stop them doing
that, I think it is just that there has been a vast migration
of talent from ITV because of particular difficulties to the independent
sector which is far more attractive in that you can work for a
number of broadcasters, you may actually get some share options
which make you money and clearly it is a far more exciting time
in terms of who you can work with. ITV are perfectly able to hit
75 per cent. It is true that any broadcaster that ceases to be
a licensed public service broadcaster is not subject to the codes
of practice contained in the Communications Act, but there is
an issue arriving in 2012 where the current legislation has to
review whether those codes would be extended to digital platforms,
amended or ceased altogether, and that is clearly a decision that
any government will have to look at and the Regulator will have
to look at by the time we reach 2012. I think that in terms of
changing the definitions, this has been looked at twice by Ofcom
and, on both occasions, they have said that any other changes
have a range of unintended consequences and the current system
seems to work quite well. I am very sympathetic to the concerns
of Scottish Television, your previous company, who feel that ITV
may not be dealing fairly with them as a broadcaster from Scotland
in winning commissions for ITV network, but I think that has a
lot more to do with ITV's ambition to restrict external supply
rather than to do with STV's status as a broadcaster or not as
an independent producer. I think that it has more to do with the
corporate strategy of ITV management and less to deal with definitions
Mr Wace: I would like to make one
other point as somebody who runs a production company outside
London. ITV's decision to stop regional programming or large chunks
of regional programming has had a devastating effect on the independent
production community outside London because they were the lifeblood
to many small companies and now they can no longer rely on ITV
as a source of revenue which has had a very significant impact.
Q347 Lord Gordon of
Strathblane: For clarification, while accepting that the reasons
for the dispute with ITV may be as you state, you would, as an
organisation, not resist the idea of STV being regarded as an
independent producer for ITV or indeed ITV itself being regarded
as an independent producer for the BBC.
Mr McVay: I am saying that we have
an open mind. I make it clear that we will certainly have to look
at what the consequences of that are because clearly, if you define
STV as being an independent broadcaster, then you may also have
to consider NBC Universal being defined as an independent producer
as well. It would be hard to see how you carve out legislation
on the definition of a postcode or a nationhood. I think that
there is a real range of unintended issues there which means that
we are quite open minded to have a debate about it but I think
that Parliament and the Lords have to be sensitive to the fact
that there are other broadcasters in the UK like NBC Universal,
a major American studio, who might also suddenly become an independent
producer as well.
Chairman: Let us move on to UK
Q348 Baroness Howe of
Idlicote: I was very interested in what you had to say about children's
programmes and that there is an 80 per cent fall which is absolutely
appalling by any standard. Under those circumstances, I think
you were suggesting that Channel 4 should have it enshrined in
their requirements, but there are presumably other genres like
drama which are in the same sort of ghastly situation. Is there
a reason in your view for ensuring that children above drama have
preference or are you really suggesting that both those should
be made mandatory as far as Channel 4 or any other public service
broadcasters are concerned and, if so, how would you do it?
Mr McVay: I think that we start
from the position where there is clear evidence of market failure,
such as in children's, then it is important for the State to consider
what is the appropriate level of provision of that genre within
the system and clearly, with ITV exiting the provision of children's
programming several years ago, that is when we first started flagging
up that there was going to be a car crash in children's production
leaving the BBC as a monopoly buyer and provider, which is exactly
what has happened, particularly in the age ranges of eight to
12 where there is no factual programming or drama now for children
other than on the BBC. We would like to see a solution and the
one that we posited is that Channel 4, under its new remit, PSB2
or whatever it will be called, should have an explicit commitment
to older-aged children, i.e. from eight to 12, to provide factual
and drama programming for them. We think that this would be in
Channel 4's benefit because it would help build an audience for
Channel 4 leading them to be in a very lucrative demographic as
those children matured into 18 to 35 year olds which Channel 4
rely on. If drama is proving to have a market failure, then the
rationale would be that there should be some solution for drama.
At this point in time, clearly there is the recession in advertising
which puts pressure on the amount of drama and the cost of drama
in the UK. There is not actually a market failure as such; we
may be heading there but I do not think we are there yet. If that
were the case, we would support some sort of intervention to support
the appropriate levels of drama to be agreed between the broadcasters
and the regulator.
Q349 Baroness Howe of
Idlicote: You concentrate rather on the older-aged childrenand
there is an equally ghastly gap now as far as junior children
as far as public service content is concernedand say nothing
about what is happening on radio with the BBC having got rid of
that. What would you do about that and also should Ofcom be given
greater powers given the fact that it did recommend, as you state
in your evidence, that ITV should continue?
Mr McVay: One of the major problems
was that children's programming came into tier three in the Communications
Act which meant that Ofcom could recommend but had no powers to
do anything about it.
Q350 Baroness Howe of
Mr McVay: So, ITV were at liberty
to exit children's programming because of the opportunity costs
that they saw in their schedule and Ofcom were powerless. So,
no matter how many peopleand I am sure you have heard many
other people including ourselvescomplain about that, effectively
the legislation did not given Ofcom powers to do anything about
it. We would like to see that changed and I am sure that Ofcom
have a view about that as well. In terms of pre-school children's
programming, the market has exploded for pre-school over the past
several years with many cable and satellite channels providing
a range of different products, most of that acquired and imported.
We have also argued that if the Channel 4 solution was not credible
or was not sufficient and there needed to be a fund that was contestable,
then those channels should be allowed to compete for that funding
in order to produce British content for pre-schools and clearly
that is where the vast majority of British children actually watch
programmes; it is not always CBeebies; it is actually on Nickelodeon
and Cartoon Network, most of which are occupied by acquired programming
that has little, if anything, to do with British culture.
Q351 Lord Hastings of
Scarisbrick: Picking up on the point that you have just made,
Mr McVay, that there are other suppliers outside of the PSB suppliers,
is it not possible therefore to argue that children's television
is superserved by multiple offerings?
Mr McVay: It is superserved in
terms of the volume of acquired programming but not made in the
UK. It is underserved by the volume of UK-originated content.
We have no problem with many channels competing to give children
a range of entertaining content from America, France, Japan, Canada
and elsewhere. The problem we see is a deficit in the UK-originated
content on those channels, many of whom would be quite happy to
invest some of their own funds if there was a way to support that
as well. The gap between their advertising revenue and the cost
of UK production is too great for them to invest currently and
many of them, when we talked to them, including Disney and Nickelodeon,
would absolutely consider doing more British content if there
was a way to incentivise that to happen.
Q352 Lord Hastings of
Scarisbrick: Could you give us some scale of the figures of the
gap between production costs for children's programmes and advertising
Mr McVay: I do not have that on
me but certainly we can provide that to you from the Ofcom research
which they did at the beginning of last year.
Q353 Lord Hastings of
Scarisbrick: If your appeal in your evidence is that Channel 4
should have this written into their terms of operation, would
this represent a revenue stream that was reliable as it can cause
Mr McVay: Yes, it would. Whatever
the solution is to Channel 4's long-term budgetary needs for British
content, within that, we would like to see a part carved out specifically
for children. Clearly, how much that is could range from £15
to £25 million, but that would give a number of things. One
is that it would give competition to the BBC to give different
voices for children on British programmes because clearly Channel
4's editorial approach to children's programming will be different
from the BBC's, which is good. Secondly, for us as producers,
it means that there is more than one buyer in the market. So,
if the BBC does not like my idea, I have somewhere I can maybe
go and try and take it and that is clearly a good thing for the
creative industries. Children's programming is very unlike most
other areas of programming in that most of the people who work
in it as producers are ex-teachers and they are very vocationally
driven. We are very concerned that, if you only have one buyer,
then why would you want to ever be a children's producer? If the
BBC do not like what you make, then there is nowhere else to go
other than abroad.
Q354 Lord Hastings of
Scarisbrick: In your evidence, you say that you are pushing for
Channel 4 to take on further remit or for public broadcasters
you talk about programming for school-age children you say specifically.
Technically, that goes up to age 18 but you have not mentioned
beyond 12 in your previous comments.
Mr McVay: I think that is because
the Ofcom research and our own earlier research on this before
Ofcom did their work indicated that the gap was in factual programming
for eight to 12 and drama for eight to 12. Most tweenies, 13 and
upwards, tend to watch up, so they will actually watch older programming.
For those who are slightly younger, there is not a watch up because
most of what they may want to watch up to their parents might
not find appropriate for their age range. Without that, then their
only choice is to go and watch more cartoons on the cable and
satellite channels. It is not because they probably want to do
that, it is because they do not have a choice to watch anything
Q355 Lord Hastings of
Scarisbrick: Given your comment about watching up, which is to
a large extent on general programming, do you think that there
ought to be a specific British content remit for the 13 to 18
Mr McVay: I am not entirely sure
about that. Our focus has been on slightly younger, either to
12 or eight to 13, if you want to dovetail with your question,
because that is where we have seen the most market failure. I
think because 13 to 14 year olds tend to watch older programming
and programming that their parents will probably watch with them,
then we do not see the same issues arising there. If you are 14,
you can access a range of factual programming, drama and documentaries
which are probably quite appropriate for you, in fact probably
very educational and developmental as well, and of course the
soaps. Soaps are a very good way of people reflecting on the lives
that they lead as well.
Q356 Baroness Eccles
of Moulton: Mr McVay, I have two questions and they are related
but different. The first one is about the Government public sector
procurement and the warehousing under Crown copyright of the intellectual
property rights and how this could possibly be released in favour
of the next generation. Do you have anything to add on that particular
Mr McVay: Yes. After the Philip
Graff review of BBC.co.uk in 2004, Philip recommended that a 25
per cent external quota was applied to BBC.co.uk, at which point
the BBC said, This is all very difficult. We cannot do
this. It is all new media". We then spent two years developing
framework agreements with co.uk. Those frameworks cover a range
of types of provision from you inventing it to you just making
it to you just writing the code. That has worked very effectively.
We think that there are frameworks already in the market which
could be adapted in principle to the public sector which would
give clarity to suppliers on the types of contracts we are entering
into with the public sector, but also clarity to the public sector
as to what they were getting as well. We think it is worth considering.
The private sector has effectively already moved this forward
and we think there are lessons there that could be used in order
to release some of that IP from Crown copyright subject to stated
issues being resolved. It may be meaningless; it may be valueless.
However, unless you actually try it, who knows? The next bit of
code or a certain application for the Department of Health to
assess diabetes might actually be a bit of code that could be
utilised in various applications around the globe. Charles has
a very good example of precisely how this does not happen just
Mr Wace: We made a social networking
site for the BBC for children which was a site that was designed
to be safe for children to actually be able to socially network,
a sort of closed environment and that is now the framework of
the C-BBC website which has been enormously successful. The technology
behind that website could, under the new terms of trade that we
have with the BBC, now be sold by that independent production
company around the world. Under the existing framework, which
was not in place when this was developed, it was not able to be
sold, so it was not actually exploited. That is a very tangible
example of how technology is merging from a broadcast project
into the software projects to which John was alluding. They are
becoming one and the same increasingly.
Q357 Chairman: Could
the BBC not have exploited it?
Mr Wace: Yes, they could and they
have. One of the points that we feel strongly about is that if,
as an independent production company, you can actually exploit
your own copyright, you tend to do it much more successfully.
Q358 Baroness Eccles
of Moulton: Would this actually mean more benefit to the original
Mr McVay: It could do, yes. Currently,
we cannot assess it because it is warehoused under Crown copyright
and there is no way to get any market valuation. It will be up
to the market. The UK is a market leader in terms of creativity.
We punch way above our weight globally because of our creativity.
I think that any government we have going forward will clearly
look to deliver a range of public services through online and,
if Digital Britain does deliver universal broadband access for
everyone, then there is a huge opportunity to use that case mix
to drive forward the development of new digital businesses that
could become globally significant and we think that it is an historical
opportunity for Britain because of our creativity, because of
our unique placing between Europe and the US and because of our
English language and our high technical skills to actually look
at all investment, both public and private, as a way of releasing
another generation of creative entrepreneurs who could then take
advantage of the new digital world. It is hard to assess the value.
We think that it is more if you want a political position and
a philosophical position on it rather than a pure economic one
at this time.
Q359 Baroness Eccles
of Moulton: My next question is one that we have asked several
other witnesses and it is one of great importance and it is to
deal with the commercial public service sector broadcasters' financial
straits, and that is mainly Channel 4 and ITV, and how they have
a heavy reliance on commissioning original UK content which is
in decline. What would be very interesting to us is whether you
have other ideas as to how more investment can be generated or
leveraged from elsewhere.
Mr McVay: They do have high levels
of commitment to British content, and I think that that is a very
good thing. It does make is one of the most exciting communications
markets in the world and one of the highest quality and I think
it is good for our overall creative industries which are, as you
know, an important part of our GDP. One of the consequences of
the Communications Act is that by giving the IP back to the producers,
broadcasters have been able for the first time in 25 years to
reduce their prices in the market. Prior to that, they had to
fully fund a programme, so they had to take all the risk. Now,
because they will not fully fund a programme, the producer has
to take some of the risk and go and find the rest of the money.
That money is currently coming from American networks, it is coming
from DVD sales, it is coming from French broadcasters and German
broadcasters, all of whom are paying for a slice of a British
programme or a British format. That money is now going back into
actually subsidising the programme budget for ITV, Channel 4,
Five and the BBC, and increasingly for the BBC as all broadcasters
seek to reduce the price of the programmes that they commission.
For many producers, that is quite a challenge and, for some areas
where the programme may have little commercial value, say for
instance a topical documentary, we think that it is not in the
public interest and broadcasters should fully fund those programmes.
However, for the vast majority of other programmers, most producers
now expect to have to raise a deficit in order to put that into
the programme to enable it to be made for the British public.
That has long been the state for British film producers who have
to go out to the international markets and raise all the money
for the films that they want to make.
Q360 Baroness Bonham-Carter
of Yarnbury: UK content, about which we are talking, is obviously
driven by UK talent which needs to come from somewhere. Although
we have a plethora of, dare I say it, media courses, we have fewer
and fewer ongoing traineeship schemes and indeed, as I am sure
you know, Mr McVay, there was a piece in The Guardian this
week saying that most traineeship courses seem to have been put
on the backburner because of the recession. I know that you come
from a training background and that you are on the Board of Skillset
and so on. Are you concerned about what is happening from the
point of view of traineeships?
Mr McVay: Yes. I am also on the
Board of the new Industry Training Board for Film Skills as well.
Q361 Baroness Bonham-Carter
of Yarnbury: Indeed.
Mr McVay: Yes, I am. I think that
what was a particularly crude response to the recession was when
ITV received £20 million of regulatory relief by the change
to the licence and the next day they immediately halved their
commitment to all training budgets. I think that was a very short-sighted
and very damaging approach to take. Clearly in a recession, you
must look at your cost base. However, as you come out of recession,
the thing that will ensure that Britain is competitive is our
skills and talent. Particularly in the creative industries, if
we are not able to sustain investment in high-level talent, when
opportunities do arrive, we may not be able to take them because
we will not have the right talent available. Clearly, my members
who are facing increasing price pressure from the broadcasters,
while it is tough to invest in training, we are committed to try
and encourage everyone to do as much as they can. With the new
Film Skills Industry Training Board with a mandatory training
levy, then the film industry will be paying and playing its way
on that. However, I think that it is incumbent on the public service
broadcasters, given that they do get a benefit from the licences
that they receive, to ensure that they invest in skills. I think
that it will be one of the most difficult issues over the coming
12 to 18 months.
Ms Calderwood: Just to back John
up on that, I think that it is crucial for the future health of
the industry but also for diversity. Both myself and John would
not be sitting here if it were not for various training opportunities.
I worked with John on a training coursewe both benefited
from Lord Macdonald who I remember coming to talk to me on a training
course I was onand it brings people who would not otherwise
be in the industry into the industry. Having training is absolutely
crucial for a diverse and healthy industry going forward.
Q362 Baroness Bonham-Carter
of Yarnbury: Otherwise, it is work experience for which you are
Mr McVay: No and work experience,
if you are not paid, is actually illegal unless you are on a proper
recognised course or are working for a charity, and that is something
we took steps to eradicate two years ago because it is an iniquitous
practice; it often relies on custom and favour and relationship
which can be to the detriment of achieving a truly diverse workforce.
Q363 Baroness Bonham-Carter
of Yarnbury: In my day, the BBC had a wide variety of traineeship
schemes; do they still offer traineeship schemes?
Mr McVay: Yes, they still do. Clearly,
the BBC is in a very comfortable position having regard to income
and possibly, at a time of recession where others face more difficulty,
the BBC should be doing more in order to ensure that there is
a broad range of talent being made available to the industry in
general going forward as part of its public purpose.
Q364 Chairman: So, Lord
Macdonald had a totally beneficial impact on your career!
Ms Calderwood: It is his fault
that we are here!
Baroness Bonham-Carter of Yarnbury:
That explains the dominance of the Scottish accent!
Chairman: It purely explains the
authority of this Select Committee!
Q365 Baroness McIntosh
of Hudnall: May we go back to the question of Channel 4 and its
remit. In your evidence, you made reference to some remarks that
Tessa Ross made when she was in front of the Committee a couple
of weeks ago about the, as it were, public service element contained
within what Film 4 does and she, as you have pointed out, very
strongly felt that Film 4 should be included in Channel 4's public
service remit and you seem to take the same view. Obviously from
the point of view of the independent producers, there is a lot
to be said for that: it guarantees that there would be a continuing
market for independent production in the future. However, two
things. Firstly, what do you think would be an appropriate quantum,
as it were, of Channel 4's resources that should be devoted to
film if it were part of their public service remit? Secondly,
what would that contribute in your view to public service broadcasting
Ms Calderwood: We want to very
strongly back Tessa on what she said about making film part of
Channel 4's remit. We think that it is absolutely crucial that
film is very central to the public service role of what Channel
4 does. The nature of film is that you have to reinvent the wheel
every time. You cannot have a returning series and, whenever a
talent is successful, it tends to be taken off to Hollywood though
sometimes they come back. Each new film has to be started afresh
and you always have to be looking for a new talent. I think that
the BBC and Channel 4 play a crucial role in that. As there has
been some consistent investment in film, they are able to look
forward and are able to invest across the board and sometimes
it pays off. This year has been a bumper year for Film 4. Having
Slum Dog Millionaire, having Hunger, having Man
on Wire, and having films like that I think has shown that,
when you can invest across the board in film, you can get very
strong returns, but it needs to have a confidence in the market
to do that. Tessa has done a fantastic job of running Film 4,
but whoever is running it needs to know consistently that investment
will be consistently there, which is why I think it is very important
that it is part of the remit. As to the level of investment, as
John said about children's, that is something that could be discussed
within the general content to the funding of Film 4 because what
film does is tend to bring investment in from around the world.
So, if you have approximately £10 million worth of funding
that Film 4 has just now, it can do an awful lot with that because
it can be the crucial risk funding, if you like, both for development
and to be the first money into film which is something that Film
4 does very effectively. When I produced The Last King of Scotland
for example, Tessa was one of the first people who said that she
would back the project and she stayed with it consistently while
we decided on various scenarios as to how we would put the rest
of the budget together. While they were around half of the money
in the film, it was crucial that that money was always there and
was consistently there so that, when we went through all the various
other hoops that we had to go through to set the film up in Uganda
and so on, it was consistent funding. The way that Film 4's funding
is set up means that they can be the most effective funding for
British production companies.
Q366 Chairman: Was The
Last King of Scotland a commercially successful film?
Ms Calderwood: It was a commercially
successful film. It has made approximately four times its budget;
it made about $40 million internationally. It has repaid its funding
to its investors in the UK. Before Slum Dog Millionaire
happened, there was a sense of Will Film 4 be able to continue?"
which was ironic because it was making money back from films like
The Last King of Scotland and it does consistently make
its money back. Every time there is pressure on Channel 4 or there
is pressure on broadcasters, there is a question mark over film.
I think that if film was part of Channel 4's remit, then that
question would not keep coming up every time and it would be very
ironic if Film 4 had not continued just when Slum Dog Millionaire
was about to hit, and there is a feeling that Slum Dog Millionaire
has certainly helped to bolster Film 4's position. As making film
is such a boom and bust business, it should not have to depend
on that because what Film 4 does is to invest across a range of
films and, with any film investor in the worldand some
of them are successful and some are notthere needs to be
a consistency of funding.
Q367 Baroness McIntosh
of Hudnall: Firstly, I would entirely agree with you that it would
be hideous if we were to lose Film 4 just at this point. Frankly,
at any point in its history, it would have been a great loss.
Turning to the issue about its contribution to public service
broadcasting specifically, I might personally feel sympathetic
to the idea but I think that, in terms of it being capable of
being understood what contribution a film, for example Slum
Dog Millionaire, is making to the notion of public service
broadcasting as such, it is a little more difficult to pull that
out. For example, compared with children's programming, it is
perfectly clear that there is, as you have already said, market
failure, there is a need and there is a public interest to be
served in providing high-quality programming for children which
all of us can understand. However, to make it a specific requirement
of a public service broadcaster that they should be investing
in film, particularly when those films then turn out to be commercially
successful in the way in which Slum Dog Millionaire has
been, is a more complicated argument and I wonder if you could
amplify that a little.
Ms Calderwood: It was not obvious
that Slum Dog Millionaire would be the huge hit that it
is when it was first initiated. It is a story about poor people
in the slums of Mumbai and obviously there has been great debate
about whether glamorising that life has been the right or the
wrong thing to do. I think that by being able to commission a
very diverse range of stories and subject matters which both represent
the UK to UK audiences beyond the television audience and also
represent the UK international is an absolutely crucial part of
public service broadcasting. Film allows you to tell a range of
stories that you would not necessarily tell on television. Although
we are incredibly well served with television drama in this country,
there is still a range of subject matters particularly subject
matters which are a kind of cross-over between British stories
and international stories. That is something that I think we do
quite well in film and a lot of our films which have been successful
have done that. Also, there is a sense where we can tell very
particularly British stories, both to ourselves in a more broad
ranging and entertaining way, in films like The Full Monty
and so on which have classically been an entertaining product
for audiences in the UK but have also represented Britain abroad
very effectively. I think that British films are absolutely central
to public service broadcasting where it leads on from drama, it
leads on from factual programming, it allows us to represent ourselves
to the world as well as to tell a broad range of stories to ourselves
and it also allows British talent to be very active within Britain.
There is a very clear pattern of British talent. Kev McDonald,
for example, with whom I made The Last King of Scotland,
has just made State of Play which is a British TV drama
for Hollywood. His next project will be a much more British film.
It allows British talent to come and go within the industry, everybody
gets to raise their game and it brings more investment back here.
If we were to lose British film, which I think we almost certainly
would if it were not for the broadcasters' investment in film,
there would be a huge gap in the range of output that we have
Chairman: I am afraid that we are
going to move on because we are a little coming up against time.
Q368 Bishop of Manchester:
In the evidence which you have helpfully been giving this morning,
words have appeared such as deficit", recession",
tough times" and I suppose not surprisingly and I
wonder if we could be a little more analytical about that and
if you could help me to interpret the figures at which I have
been looking and trying to make sense of which are the UK Film
Council's figures for film production over the period 1992 to
2008. It would appear that, for example, the year 2003 was a very
good year. It would also appear in terms of co-productions that
things have gone downhill quite rapidly over the last few years.
If I were to try, in a very amateur way, to sum up the figures
at which I am looking at the moment, I think they would suggest
to me that, in terms of film production expenditure and in terms
of employment, you are at a bit of a stagnation point at the moment
and I wonder if you could clarify that for me, please.
Ms Calderwood: I think the area
in which there is a real cause for concern is in co-production
and that is as a direct result of the tax credit which has come
in. The tax credit has been a good thing in many ways. It has
stopped abuse of the system that was there before. It is very
clear and very straightforward to operate and people know exactly
what they are going to get from the tax credit. However, the one
problem we have with it is that it is based on goods and services
used and consumed within the UK. For example, despite the fact
that they had top British talent working on Slum Dog Millionaire,
they could not claim tax credit on for example the director, the
director of photography and so on because they were working outside
of the UK. One thing that we are campaigning for as strongly as
we can is that the tax credit is applied to British talent and
British facilities used outside the UK as that would have a clear
financial benefit to production. The Treasury set a target for
how much they expected to spend on the tax credit and that target
has not been reached. Even if we did change the definition to
be on British goods and services used outside the UK, we would
still be within the Treasury's target for that. It would make
a huge difference to film production and it would also incentivise
production companies to use British talent. For example, I am
in the process of financing a film that is set in Nigeria and
I will probably use crew from South Africa because they are slightly
cheaper and there is no benefit to me taking British crew there.
However, if I could claim tax credit for a British crew, I would
take my British crew to Nigeria. If we could change that definition,
then I think it would incentivise us to use British talentwe
all want to use British talent because that is who we know and
who we like working withand it would give a clear financial
incentive to use them.
Mr McVay: Clearly, in times of
difficulty and recession, it would be good to give jobs to British
workers rather than give jobs to South African workers.
Ms Calderwood: It also allows us
to bring more to the table on co-production. The British industry
likes to invest in British content. So, if you are trying to do
international co-production, there are difficulties in what you
can bring. If an international producer wants to shoot here and
we can make more of the tax credit, then it allows us to co-produce
more easily which would allow the level of co-production to go
Q369 Bishop of Manchester:
We have heard about the issues over tax credits in other evidence.
In terms of the economic downturn to which Mr McVay was referring
a moment ago, how hopeful are you that things will get better,
or are you really in a stagnation which goes deeper than simply
an economic downturn?
Mr McVay: In terms of the headline
figures, you can see those various blips from 2003 to 2008. A
lot of that is to do with dollar/pound exchange rate where Americans
assess the cost of filming in the UK against the dollar/pound.
Clearly, since that situation has improved, I am sure that, under
the good offices of our Film Commissioner and the Film Council,
they are working very hard to attract lots of American production
to the UK and therefore we are hopeful that inward investment
will be sustained if not increased. However, for indigenous co-production,
the figures are very blunt and very bleak in that we have gone
from a peak of 165 in 2003 to 42 co-productions last year. Now,
that is where our major concern is because the co-productions
are used by British indigenous companies, not by inward investment.
Q370 Lord Macdonald
of Tradeston: Just staying on co-production for a moment, are
there any other economic factors involved or are you saying that
the new tax credit scheme is entirely responsible for this decline?
Ms Calderwood: I think that it
is the key factor. You can see the difference. As John was saying,
the dollar exchange rate had an effect for a few years. It has
now gone the other way. Similarly, the euro exchange rate has
gone the other way, so actually you are more likely to be able
to now co-produce or the investment from the US for example goes
further than it used to. That will start to slide in a different
direction but I think that the tax credit is the one key factor
that has made a difference.
Q371 Lord Macdonald
of Tradeston: Going back to the generality of the film tax credit
scheme, you implied that it was an improvement on what went before.
What kind of impact has it made on your members compared with
the previous regime?
Mr McVay: As the previous regime
was subject to a number of loopholes and various very sophisticated
financial instruments, sideways tax relief et cetera, when you
were the producer and you had someone in a suit coming up to you
and saying, I can given you 40 per cent, don't worry how
this is put together", you know, people wanted to get their
product made. The new tax credit is very clear and very precise
which means that the producer has confidence that, if they qualify
for British film, the Exchequer will pay the percentage of the
budget that is appropriate to the qualification and that is something
that they can take to the bank and then there is not going to
be any sudden review or any loophole being closed all of which
caused incredible instability in the market for a number of years
and which meant that when British producers were financing a film,
they did not really know at which point the Inland Revenue may
come round and say, Actually, that process is no longer
allowed. Therefore, you are now 20 per cent short on your budget"
and you then had to go and find another 20 per cent from financiers
somewhere else in the world. That created a great deal of instability
and insecurity. Whilst there are parts of the new tax credit which
we feel could be improved, compared to the previous regime, it
is far more secure and stable and I think gives far better value
to the taxpayer.
Ms Calderwood: Another advantage
of the tax credit is that it has been clearly targeted at producers
rather than at financiers if you like, and what we have been doing
in PACT is working with the public service broadcasters and the
public funders to the Film Council to maximise the benefit of
tax credit to producers. Initially, we tried to have the tax credit
regarded as producer equity because it is not money that anybody
else has to recoup, it is money that helps to finance the film
but does not have to be paid back to anyone. That did not prove
possible in the marketplace, but what we have done is that, by
demonstrating to BBC, Film 4 and the Film Council how the tax
credit improves their revenue, we can take a share of that revenue
and we have negotiated figures around 25 to 30 per cent with the
broadcasters and we are just in the process of trying to confirm
that with the Film Council. The Film Council have agreed the principle
of that, but it is now with the DCMS to be approved for state
aid issues. That is something that would also make a very concrete
difference to film producers because, as we said earlier, film
producers basically have to sell their rights in order to finance
the film, but this would create a revenue stream to film producers
which would link the revenue of the film company to the success
of the film in the marketplace and I think that that will make
quite a crucial difference to film production companies.
Q372 Lord Macdonald
of Tradeston: If you are expanding the scope of the scheme, are
you confident that you could define precisely what changes were
made and that you could avoid the abuse through the extension
of the scheme?
Ms Calderwood: Yes because it is
targeted at production companies and it is very much targeted
on talent and facilities used and consumed in the film production.
It very much now works on real films whereas before there were
films that were almost made up as tax breaks basically. The tax
credit as it stands now is here to make sure it is specifically
for film production.
Q373 Lord Maxton: You
have some criticisms of the Lottery funding in the UK Film Council,
which you have accused (accused" might be the wrong
word) of being commercially aggressive in the way they approach
the money they get. Maybe you can explain what you mean by that.
Ms Calderwood: The Film Council
has done a fantastic jobto make that clear to begin with.
I was previously the Head of Production when the Lottery franchise
was active in Lottery film production when the Arts Council was
giving money to film, and there was a big question mark then about
whether it was possible to invest Lottery money successfully in
film. I think the structure of the Film Council, which has fund
heads specifically investing in certain films, has been shown
to work and they have been involved in a broad range of successful
films. The issue that film producers have with the Film Council
is that their revenue from film goes back into funding Film Council
overheads and non-film production related activities, which means
that the Film Council tends to operate like a commercial investor
because they are looking to increase their profit effectively,
and the effect of that is that, rather than working in partnership
with film producers to increase revenue across the board for reinvestment
in film in the UK, they work in an adversarial way where they
are trying to get a better deal from film producers. What we have
tended to find, sometimes, is that they are the toughest people
that we have to negotiate with, because they are looking to increase
the revenue stream to the Film Council. That is not the case with
other film funding bodies in other countries internationally,
and it does not seem like the most healthy relationship between
the Film Council and the film production community it is intended
to support that they have this aggressive commercial stance. Obviously,
if we agreeand we have agreed the principleon this
tax credit proportional share to producers, that will be a help
because it will give a deal term that can be agreed across the
board, like terms of trade for TV, but we would like to see the
Film Council act more positively with film producers to try and
find ways that they can work in partnership to raise revenue rather
than this adversarial stance that they have taken in the past.
Mr McVay: It is not because the
people themselves are adversarial; it is because the structure
that was conceived of when the Film Council was created was predicated
on Lottery recoupment being reinvested to meet their overheads.
So it is actually part of the structure. What we would like to
see is a review of that structure to make sure that when Lottery
funding was invested it was in the most productive and supportive
way to enable successful British producers rather than to have
to drive their overheads.
Q374 Lord Maxton: What
will be the impact of the fact that, because there is the Olympics,
there is going to be a cut in Lottery funding, and there are indications,
increasingly, that in the recession people are going to spend
less on the Lottery anyway? So the general pot is going to be
smaller. Is that going to impact, do you think?
Mr McVay: We do accept that both
those factors, the Olympics and, already, restructuring of the
Film Council's finances, may impact on the amount of funds that
they have to put to film. However, provided whatever amount they
have is put in intelligently and supportively, we think you can
still get optimal results to develop an indigenous and sustainable
British film industry.
Ms Calderwood: I think the case
is quite similar to the case that used to be made when the terms
of trade that John referred to earlier for television were being
lobbied for; people said would TV companies know what to do with
the revenuewould it not mean that the broadcasters would
be weakenedand, actually, it has shown that the industry
is stronger because they are stronger TV production companies.
That is the argument that we are making for film companies; it
is not to take all the revenue away from the Film Council but
it is just that if there is a more substantial proportion of investment
that comes back to film production companies they can move away
from being fee-based companiesas the TV companies used
to beand they can actually work more effectively as stand-alone
production companies. It is less of a cap-in-hand relationship;
it is more of a genuine, healthy industry rather than always having
to, effectively, ask for subsidies. So it is to find a way that
we can share the revenues, because if production companies are
incentivised to get revenue then I think, having worked in international
productions where the production companies do have their government
investment and their equity share, they are actually better funded
companies, so they can bring investment to the table, as the TV
companies do. So it is to try and find a way that a proportion
comes to the production companies which would, in the end, benefit
the Film Council because we should be able to make more profitable
films on that basis.
Q375 Chairman: That
is a very interesting point. Thank you very much indeed. It has
been a very interesting session, and thank you also for this extremely
good submission, which I think is a model of what should be. We
are very grateful. I think we are almost certainly going to have
other questions to you, but perhaps we can correspond with you.
Thank you for coming.
Mr McVay: Thank you very much.
50 The witness has added a clarification to the effect
that PACT's concerns about children's programming extend not only
to the eight to 12 age group, but also to those up to 15 years,
who may not be ready to -watch up". Back